The standard deviations for share of Blue Company, share of Green Company and the general market are 2%, 8% and 9%, respectively. The rate of return on government bonds is currently 5%. The following table indicates the randomly selected three sample returns for share of Blue Company, share of Green Company and the market.
Rate of Return (%)
Share of Blue Company
Share of Green Company
General Market
6
-5
12
8
7
14
10
10
28
(1) Calculate the correlation coefficient between share of Blue Company and the market and that between share of Green Company and the market.
(2) What are the beta values for share of Blue Company and share of Green Company, respectively?
(3) Use CAPM to determine the rates of return or share of Blue Company and share of Green Company.
(4) If the current rates of return of share of Blue Company and share of Green Company are 9% and 10%, which share is underpriced or overpriced?
(5) A investor tries to build a portfolio with a T-bill; Share of Blue Company; and Share of Green Company, all equally weighted. If the T-bill provides a risk-free rate (the same as government bonds referred to); calculate the expected return and risk of this new portfolio. Also, discuss whether the portfolio is a wise choice in this market.
